Tesla (NASDAQ: TSLA) and the Rise of the Gigafactory

A Massive Goal for Battery Production

If you have any doubt about the vision of Tesla Motors (NASDAQ: TSLA) and its CEO Elon Musk, you obviously aren't thinking enough about batteries.

Last year, Nissan upgraded a thirty-year old factory in Smyrna, Tennessee so it could crank out a greater number of battery packs. The upgrade cost approximately $1.4 billion, and turned Nissan into the largest lithium ion battery producer in North America, capable of pumping out approximately 200,000 battery packs per year.

...Tesla is going to DOUBLE that.

Since the end of 2013, Musk has been talking up a Tesla “Gigafactory” capable of producing half a million second-generation Tesla electric vehicles per year and ultimately reducing the high cost of electric car batteries.

By the year 2020, the Gigafactory is expected to produce more batteries than the entire industry produced last year. It will do this by keeping battery chemical material, cell production, and module and pack production in-house at a single factory.

“With this facility we feel highly confident of being able to create a compelling and affordable electric car in approximately three years,” Musk asserted in a public statement. “ This will also allow us to address the solar power industry’s need for a massive volume of stationary battery packs.”

Last year, Tesla produced 24,000 electric cars. With an increased battery production rate, Tesla could produce more than 100,000 cars per year by 2018.

The factory will incur a $2 billion investment from Tesla and could end up in one of four target US states: Nevada, New Mexico, Arizona, or Texas. Battery packs will be shipped from the Gigafactory to Tesla's facility in Fremont, CA for assembly.

Allies

Construction of the Gigafactory is expected to begin in 2014 and the total cost is expected to be in the $4 to $5 billion range. Tesla itself is sinking $2 billion into it, so it will require heavy investment from Tesla's partners like Panasonic (OTCMKTS: PCRFY) and its subsidiary Sanyo (TYO: 6764).

Fortunately, these companies are well acquainted with large scale EV battery production, and Panasonic has been working with Tesla for four years on battery technology.

Sanyo, meanwhile, has been moving to capture a majority segment of the electric vehicle battery market on its own. It already provides battery packs for hybrid and electric cars from Volkswagen and Suzuki, and in 2011 it completed a facility in Kasai City, Japan that has the capacity to make up to a million lithium ion cells per month.

Musk has said there are other partners involved in the project, but hasn't yet named them. The company's announcement about the Gigafactory this week showed an overview of the factory's design which included both wind and solar farms on the surrounding land. Presumably, Musk's own SolarCity (NASDAQ: SCTY) will have something to do with the solar energy system, but the wind power provider is a mystery at this point.

Competitors

South Korea's Samsung SDI is currently building an electric car battery factory in China's Shaanxi Province as a joint venture with “an unnamed, government-owned firm” and the auto parts company Anqing Ring New Group. The plant is slated to begin production by the end of calendar year 2014, well in advance of Tesla's 2017 production launch.

By moving production to China, Samsung will cut down on labor costs, but that cost-saving measure might result in slower output.

According to the journal American Manufacturing, Chinese battery manufacturing is generally slower than Japan and Korea because they “significantly lack automated transfer between assembly stations; instead, each station in cell assembly is separate.”

Samsung SDI's electric car batteries currently fall under the xEV moniker, and are made up of a Graphite negative electrode and a Lithium Metal Oxide positive electrode.

South Korean company LG Chem, and its subsidiary Compact Power Inc. became early leaders in electric vehicle batteries when they secured a contract to provide the batteries for the Chevrolet Volt back in 2008. Though Compact Power was selected to provide the battery packs for the Ford Focus Electric in 2011, the leadership of these companies in the American market looks to be limited.

At the time of their deal with LG Chem, analysts said General Motors chose South Korean companies simply because there was no domestic infrastructure to provide large volumes of electric vehicle cells.

With the upper limit of factory capacity rising in the United States, GM will soon have domestic options for battery suppliers that can meet their demands. Tesla already acts as an original equipment manufacturer (OEM) for a number of companies, including Smart, Mercedez-Benz, and Toyota, and would make an ideal domestic OEM for General Motors.

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It's not uncommon to want to invest in a company because of the CEO. When a leader has an uncompromising vision, their perspective on business decisions becomes easy for any outsider to understand. GE's Jack Welch led a massive turnaround by making painful cuts for a greater good, irrespective of politics. Apple's Steve Jobs refused to accept computer product designs that were anything less than “magical.”

The Gigafactory is emblematic of Musk's uncompromising vision for transportation and energy. A single factory of this size — powered by renewable energy and producing more clean energy products than the entire industry — is an extremely big goal.

But when these huge goals are reached, huge value is created.

Earlier in February, Tesla stock broke the $200 limit for the first time and it has only gone up since. Earnings drove shares up, and the promise of the Gigafactory has driven shares up even more.

While looking at the chart of TSLA growth yesterday, my colleague Briton Ryle was incredulous.

“I know people have said this before,” he laughed, “But Tesla is the new GM.”

Energy demand will increase 58% over the next 25 years.

Trillions will be spent to secure the world's energy supply over the next two decades... and all sources are on the table.

Oil, Natural Gas, Solar, Wind. There will be money made.

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